Biotech Stock Mailbag: Exact Sciences, Questcor, Biotech M&A, Celsion

@adamfeuerstein Too late for this week's mail bag, but would like your thoughts on $EXAS recovery from its deep dip after data.— hvypilot (@bigojetairliner) May 10, 2013

The results from the phase III study of Exact Sciences' ( EXAS) non-invasive colon cancer screening test were labeled disappointing by a lot of investors, analysts and biotech stock commentators (ahem) when released on April 17.

Here's a chart of Exact Sciences since the Cologuard data were announced: EXAS data by YCharts

So much for conventional wisdom.

For an explanation, I sought out a hedge fund manager source who's been a stalwart Exact Sciences bull. He still owns the stock today. His fund's rules prohibit speaking on the record to the media.

The Cologuard study results -- 92% sensitivity to colon cancer, 42% sensitivity to pre-cancerous lesions and specificity of 87% -- fell below expectations set by the company, my investor source agrees. But that's an artificial perception issue important only to Wall Street and had nothing to do with how well Cologuard actually works or whether it will be used by doctors and patients to screen for colon cancer.

"The fact is Cologuard is an approvable colon cancer screening test that is superior to FIT," says my investor source. FIT is a currently approved stool-based screening test, which is less accurate than Cologuard.

"There are about 3 million FIT tests performed each year in the U.S. Conservatively, I believe Cologuard could take two-thirds of FIT's market share, or 2 million tests. At $500 per Cologuard test, that's $1 billion in revenue for Exact Sciences," he says.

Moreover, there's upside to these numbers if Exact Sciences can improve upon the historically low compliance rate of the FIT test, which my source believes the company can achieve.

Alan P. writes:

"With biotech companies doing so well and the stocks surging, I'm surprised that we're not seeing more acquisitions being announced. Is there a reason for this? The rumors about takeovers don't seem to come true very much and I wonder why. Thanks for your help."

Alan is correct about the relative dearth of healthcare mergers-and-acquisitions activity this year. Through the end of May, U.S.-based M&A healthcare deals totaled $34.1 billion, down 12% compared to the same time period last year, according to healthcare merchant bank Burrill & Co.

It's impossible to pinpoint precisely the reason(s) for the drop off in biopharma M&A this year, but the biotech bull market is a likely culprit. Think about it, biotech and drug -- companies, regardless of quality, are expensive right now, making it more difficult for potential acquirers to make deals work financially. Factor in takeout premiums and there's probably a lot of potential buyers out there suffering from sticker shock.

I view initial public offerings as the flip side of the M&A market and they're booming like never before. Seventeen healthcare IPOs have already hit the market this year with another 18 companies in registration, according to Burrill. These are figures from the end of May, so the number has probably already gone up in June.

In bleaker economic times, many of these private companies would have been shopped around and bought instead of going public. Today, IPOs over M&A is a viable option.

Lastly, I'd say the potential acquirers -- aka Big Pharma -- are perhaps less hungry for big M&A deals than in years past, partly because their base businesses are recovering and internal R&D efforts are more successful. Bristol-Myers Squibb ( BMY) is up a phenomenal 42% this year; even Pfizer ( PFE) is up 10%.

My ability to predict biotech takeouts remains abysmal. The five biopharma companies I predicted would be acquired this year -- BioMarin ( BMRN), Onyx Pharma ( ONXX), Medivation ( MDVN), Achillion Pharma ( ACHN) and Incyte ( INCY) -- are all still untouched. They still have six months to make me look smarter.

One last word on this subject: Not to incite panic, but surging biotech stocks appear to be losing some of their oomph. Be careful what you ask for but perhaps a significant correction will light a fire under M&A dealmaking. IBB data by YCharts

I have rarely weighed in on the bull-bear debate that rages over Questcor Pharmaceuticals ( QCOR). Generally, I view Questcor's business model -- with respect to Acthar pricing and marketing -- to be slimy but smart and legal. Questcor identified loopholes and gray areas within the law and took advantage of them to make a lot of money off an old drug. Questcor is not the first drug company to operate in this manner and it won't be the last.

In the past year, Questcor's Acthar marketing practices have come under a lot of scrutiny from insurance companies, some of which are pushing back. At the same time, Acthar sales continue to grow, which has helped Questcor's stock price regain almost all the losses suffered last fall.

Along the same lines, I view the Synacthen acquisition as another smart and duplicitous move by Questcor management. By buying Synacthen from Novartis ( NVS), Questcor pockets a potential competitive threat to Acthar. The purchase agreement includes language to compel Questcor to develop Synacthen and seek U.S. approval. You're totally naive if you believe Questcor will ever do such a thing. The company will find a way to bury Synacthen in a deep hole, even if it requires paying financial penalties to Novartis.

One year ago, this is how Questcor Chief Scientific Officer David Young spoke about Synacthen:

With respect to Synacthen, a synthetic peptide marketed by Novartis in Europe and Australia. We believe unlikely to be competitive to Acthar. Synacthen is a fragment of ACTH called tetracosactide and is not an androgynous peptide of the body. It has the different amino acid sequence and a different pharmacology profile from Acthar Gel. Synacthen contains benzyl alcohol, which is toxic to children, it can potentially cause gastric syndrome, it can be fatal.

Since Acthar Gel is widely used in children under 2 years of age for infantile spasm, Synacthen might face substantial safety and distribution issues in U.S. In addition, Synacthen would face the same regulatory and business issues discussed earlier for similar ACTH trials...

This week, Questcor CEO Don Bailey sings Synacthen's praises:

As an emerging leader in melanocortin research, we now have the opportunity with Synacthen to expand and accelerate our product development activities. We believe such efforts will enhance our expanding R&D program. In addition, this key acquisition provides an opportunity to initiate our presence in more than three dozen international markets, giving us an opportunity to reinvigorate Synacthen in these markets and providing us a platform for potential international growth.

Adds Young:

We intend to develop and seek FDA approval for Synacthen and are committed to developing this product not only in conditions different than Acthar but also in conditions where Synacthen would potentially provide a clinical benefit over Acthar.

Proof that investors should think twice before believing anything that emerges from the mouths of drug company executives.

Pierre G. writes:

Last month you had a piece about Celsion (CLSN) and I completely disagree with you. Yes, to the extent that Celsion management made a mistake using such a large study group but it would seem that when involving just the subgroup mentioned, data are substantially different. Have you changed your opinion here?

Thermodox failed. End of story. Don't buy Celsion on the hope this liver tumor therapy can be resurrected. It won't happen. Celsion is trying to convince you otherwise, assisted by a small cadre of clueless stock promoters on Seeking Alpha, but don't listen to them. Thermodox doesn't work. The data don't lie:

Trust me, there are two curves on that graph. It's hard to tell because they sit right on top of each other, meaning Thermodox is a placebo. The therapy had no benefit at all for patients with liver tumors.

The survival curves from the HEAT study look exactly the same as the PFS -- completely overlapping, no benefit whatsoever demonstrated for Thermodox. "HEAT" was a large and well-conducted study. The conclusions are definitive. Thermodox doesn't work.

Yet Celsion persists in misleading investors with post-hoc looks at arbitrary subgroups of patients. The company claims Thermodox may benefit patients who underwent more than 45 minutes of RFA therapy. Why 45 minutes? Why not 30 minutes or an hour? There is no scientific rationale for why 45 minutes or more of RFA therapy would make a difference and Celsion doesn't offer any. Celsion chose the 45-minute cut off because that's where the fake re-analysis looks best for stock promotion purposes.

This slide, a version of which I published in April, debunks the 45-minute RFA story:

You're looking at the pharmacokinetics of Thermodox. In other words, how much Thermodox gets into a patient's bloodstream following RFA treatment. What you see, clearly, from the graph is patients get the vast majority of Thermodox in the first 45 minutes of RFA treatment. Extending RFA treatment beyond 45 minutes isn't going to expose tumor cells to more Thermodox, which means Celsion's post-hoc analysis is bunk.

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback;
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